Complete Guide to SWIFT Payments and SWIFT Banking

The SWIFT banking system makes sending global payments of all types possible–but which type best suits your business’s needs? Learn more below.

As global commerce evolves, countries have searched for a safe and secure means to get money from one bank to the next. International transactions often require a network or intermediary institution to ensure everything goes smoothly. In Europe, it’s called SWIFT.

What is SWIFT?

SWIFT (Society for Worldwide Interbank Financial Telecommunication) is a global financial messaging network that enables financial institutions worldwide to securely exchange information and electronic messages about financial transactions.

What is a SWIFT Payment?

SWIFT payments are transactions made through an intermediary bank that allows you to send/receive electronic payments internationally. The SWIFT network doesn’t actually transfer funds, nor is it a banking system. Rather, it sends payment orders between banks using SWIFT codes. The SWIFT payment system is a means to transfer money overseas quickly, accurately, and securely. 

The financial service creates a global level of connectivity that speeds up international business and brings the world a little closer together. In December 2022, SWIFT recorded an average of 44.8 million FIN messages per day. Traffic grew by over 6.6% versus the same period of the previous year.

The SWIFT payment network allows individuals and businesses to accept/send international money via electronic or credit card payments. This can be done even if the customer or vendor uses a bank that is different from the payee. The network is a place for secure financial messaging. In a sense, it’s nothing more than a messenger between banks. 

What is a SWIFT Code?

How does SWIFT work? When you use SWIFT, you are not actually sending a money transfer. Instead, it is referred to as a “payment order” between two banks. This is done using a SWIFT code. 

When looking at IBAN vs SWIFT, it was the SWIFT network that standardized the formats for IBAN (international bank account numbers) and BIC ( bank identifier codes). SWIFT owns and administers the BIC (Business Identifier Code) system. This means it can identify a bank in seconds and send a secure payment quickly.

A unique SWIFT code is comprised of 8 or 11 characters. Other names for this same code include:

  • Bank identifier code (BIC)
  • ISO9362

Example of a Swift Code

An example of a SWIFT code is the Italian bank UniCredit Banca in the city of Milan. The code is UNICRITMM. 

The first four characters (UNCR) are the bank code. The next two characters (IT) are the country code for Italy. Then, the next two characters (MM) stand for the bank’s location or city code. The last three characters (which you do not see here) are optional. They are only used by banks to assign codes to individual branches. 

Using a SWIFT Code

An example of this would be when a customer walks into a major bank, like Royal Bank of Canada (RBC), and wants to make an international money transfer to their friend in Venice through Intesa Sanpaolo. They would need their friend’s bank account number and the unique Bank Identifier Code (BIC) that applies not only to Intesa Sanpaolo but to the exact branch in Venice.

RBC would then send a SWIFT message to Intesa Sanpaolo over the secure SWIFT network. Once the Italian bank receives the message, it will clear and credit the money to the Italian friend’s account, while RBC debits the customer’s account.

How Does a SWIFT Payment Work?

The original design and intent of SWIFT was to create a way for banks to communicate faster and more securely among themselves, particularly in relation to processing international payments. The word “communicate” is always used because SWIFT is simply a messenger between banks. SWIFT money does not exist. It channels the message enclosing payment instructions from the issuing bank (i.e. the payor) to the remitting bank (i.e. the beneficiary/receiver). 

All banks engaged in a SWIFT transfer will move funds from one account to another based on an underlying network of Nostro and Vostro accounts. This refers to accounts that banks have opened up with each other for the sole purpose of executing SWIFT transactions. 

How to Make a SWIFT Transaction

To make a SWIFT transaction, follow these steps:

  1. Contact your bank: Provide them with the details of the transaction. This includes the recipient’s name, bank name, account number, amount, currency, and any other relevant information.
  2. Complete the required forms: Your bank will provide you with the necessary forms to initiate the SWIFT transaction. These forms will typically include information on the originator and beneficiary of the transaction, the amount to be transferred, and the currency involved.
  3. Provide payment: Once the forms are completed, you will need to provide payment. This typically involves transferring the funds from your account to your bank’s account.
  4. Wait for confirmation: Once the transaction has been initiated, you will need to wait for confirmation that the funds have been transferred successfully. This can take several hours or even days, depending on the banks involved and the complexity of the transaction.

SWIFT transactions can be costly, especially for smaller transactions, as they often involve fees and charges from multiple banks involved. You should also ensure that you provide accurate and complete information to avoid delays or errors in processing.

The Nostro and Vostro Accounts

As both banks keep a record of money deposited into the account, this leads to two mirroring sets of ledger known as the Nostro and Vostro accounts. Nostro refers to the account used by the bank to hold money, whereas Vostro refers to the name of the account used by the bank opening it in their books. 

When both banks have a commercial relationship with Nostro and Vostro accounts, the SWIFT transfers are direct and immediate. When banks do not have this type of relationship, the SWIFT network has to determine the best means to pass the message on. In this case, a third party is required; also known as an intermediary bank

You have to find a middleman to handle the transaction. Once a correspondent bank that has a commercial relationship between the two financial institutions is found, the SWIFT transaction can proceed. In this case, additional fees will be incurred from the third-party services.

The more intermediary banks involved in the transaction, the more it will cost you to send. It will also take longer to send the payment, which is at a much higher risk as there are more parties involved. 

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Who Uses SWIFT Payments?

In the beginning, SWIFT was created to facilitate communication about treasury and correspondent transactions only. The functionality of the message format design allowed for large scalability. SWIFT gradually expanded to provide services for:

  • Banks
  • Clearing systems
  • Money brokers and security broker-dealers
  • Corporates
  • Non-bank financial institutions
  • Treasury market participants
  • Asset management companies
  • Depositories
  • Foreign exchange
  • And more…

How Much Does SWIFT Cost?

SWIFT is a cooperative society that is owned by SWIFT members. These members are categorized into classes based on their share of ownership. All members pay a one-time fee plus annual charges, which vary by member class. 

In addition, the messaging system makes money by charging users for message type and length. These charges will vary based on the bank’s usage volume. This explains why you pay different fees for international payments from one bank to the next. Another reason is the bank’s commercial policy on international funds transfers.

SWIFT also charges for extra services like business intelligence, professional apps, global payments innovations, and compliance.

A Brief History of the SWIFT System

Prior to the development of the SWIFT network, banks relied on a system called TELEX to send wire transfers. Not only did the process move at a snail’s pace, but TELEX lacked the security and sophistication for a time when technology was making exponential progress. The free message format did not have a unified set of codes (like SWIFT) to name banks and transaction types. This created a lot of confusion and led to many human errors. TELEX senders had to describe every transaction in full sentences, which was then interpreted and executed by a dedicated receiver.

Therefore, as necessity is the mother of invention, the SWIFT network was born.

SWIFT is a member-owned organization. It was founded in Brussels, Belgium, in 1973 for the purpose of establishing common processes and standards for financial transactions. Banks needed a universal and consistent way to get money across the oceans. That’s where the SWIFT network comes in. Six major international banks formed a cooperative society to operate the global network in a secure and timely manner.

What is the SWIFT Payment System?

The SWIFT payment system enables banks and other financial institutions to securely exchange electronic messages about international transactions. It provides a standardized messaging platform that facilitates communication between banks and other financial entities.

How Does the SWIFT Payment System Work Today?

Currently, SWIFT provides messaging services to over 10,000 financial institutions in 212 different countries worldwide and helps facilitate global business. SWIFT achieved a new peak day on 30th Nov 2021, with 50.3 million messages, higher than the peak on 26th Feb 2021 by +8.5%

While the network started primarily for simple financial messages and payment instructions, it now sends reference data for a wide range of actions. This includes transactions for:

  • Security  
  • Treasury  
  • Trade 
  • System

In Swift’s latest report, from January 2022, data showed 44.5% of SWIFT traffic is still for payment-based messages, while 50.6% represents security transactions, and the remaining traffic flows to Treasury, trade, and system transactions.

Economic Sanctions

In the past decade, SWIFT has also been used for economic sanctions. In 2012, the European Union passed a sanction against Iran that compelled SWIFT to disconnect sanctioned Iranian banks.

As of Feb. 28, 2022, the United States, EU, U.K., and Canada have agreed to levy sanctions against Russia in response to its invasion of Ukraine. They have agreed to remove select Russian banks from the SWIFT messaging system.

Additional SWIFT Services

The SWIFT system offers many services that will help you send seamless, international transactions. Here are a few to check out:

Industry-leading Applications

SWIFT connections give you access to a variety of applications, from real-time instruction matching to forex transactions and treasury. 

Expect applications that include tools for:

  • Banking market infrastructure for processing payments between banks
  • Securities market infrastructure for clearing and settlement instructions
  • Instructions for securities, forex, and derivatives transactions

Business Intelligence

SWIFT offers universal business intelligence dashboards and reporting utilities. This enables customers to get a dynamic, 360-degree view of messaging, activity, reporting, and trade flow. You can filter based on demographics like region, country, message types, and other related parameters.

Compliance Services

SWIFT offers services aimed at compliance with financial crime. This includes reporting and utilities for Know Your Customer (KYC), Anti-Money Laundering (AML), and Sanctions. 

Messaging and Connectivity

SWIFT is the king of conversation, and the entire focus is communication. The core of the business resides in streamlining the movement of messages and providing a safe, reliable, and secure network. SWIFT has a variety of messaging hubs and software so clients can effortlessly send and receive global transactional messages.

Global Payment Innovations

SWIFT’s latest service is called SWIFT Global Payments Innovations (GPI). The goal of SWIFT GPI is to improve the traceability and transparency of all cross-border payments. This means if your bank is a member of SWIFT, they can check on the status of a payment at any given time of day. This type of flexibility when it comes to international payment processing is unparalleled by any other system. 

The Future of SWIFT

Although there are other real-time messaging services like Ripple, Fedwire, and Clearing House Interbank Payments Systems (CHIPS), SWIFT continues to retain a dominant position in capital markets. There’s a good reason for that, too. The attributed success is due to how continually the network adds new message codes to transmit different kinds of financial transactions. In other words, it’s constantly adapting to new financial needs and fintech processes. This makes it the most reliable, flexible, and functional system for international wire transfers on the planet.

If your business is considering using SWIFT as a messaging network, understanding the process is a good first step! However, there are numerous options for paying international suppliers, from prepaid debit cards to international ACH to wire transfers and more. Check out our latest eBook: Comparing the Top Global Payment Methods, for more.

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